According to the RFR, Massachusetts will be exploring Pay for Success contracts in two social issues: chronic homelessness and juvenile justice. This statement represents a welcome shift in the way we approach social impact in two significant ways. First, it orients service providers towards understanding that in a particular social issue, it is a type of program model based on best practices that drives real change, not an individual organization. Second, focusing on common issues will allow the agreement between government and nonprofits working in that social issue area to use common indicators and common terminology related to outcomes. We at Root Cause, call this information alignment because focusing on an approach that works starts to align the terminology of all groups striving towards outcomes in that area. If we do not start calling the social issues by the same name – and realize that not individual organizations, but rather programs based on best practices produce a measureable outcome, how will we ever agree on what high performance is?  We were also pleased to see chronic homelessness selected in the RFR, as it is one of the eight social issue reports we have produced. It is also an area where we believe there is a great deal of evidence of what approach works effectively.

Another aspect of the RFR I really liked was that it does not assume a need for intermediaries to implement Pay for Success contracts. Instead it looks to intermediaries as a potential supplementary to support the initial Pay for Success contracts model if needed.  While I applaud the efforts of Social Finance, and am incredibly impressed by their laser focus on making sure this idea is successful, it is good to see an alternative experiment where government and nonprofit programs try to negotiate the terms of agreements without an intermediary. A huge concern in using the Social Impact Bond model was that it involved large levels of additional resources to even set up the payment structure. Thus, the absence of an intermediary might help the model be more scalable in an already resource-strapped environment.

Thus, with the RFR milestone comes a larger hill that we still have to climb: reallocating current government funds to social programs engaging in the pay for success model, without raising additional money from outside sources in a time of austerity. It will not be easy to renegotiate the terms of the billions of dollars being spent currently and to reallocate this money to programs in chronic homelessness and juvenile justice that engage in new Pay for Success contracts. However, if we are truly going to make progress, we need to head towards a performance-based allocation of resources. The announcement this past week is a step in the right direction. I am hoping we will now see more experiments that don’t just rely on increasing philanthropy, but instead focus on the assessment of how current government funds are being allocated to programs across different social issues.

Illustration: Shannon May

I have been asking myself this very question since the day I sold my business in 1997 and decided to devote my career to making progress on social issues. While I am still certain we must do a better job in building a system that allocates resources towards performance and while I am clearer on what does not work, I am much less clear on what does work. At one point in my career, I thought making social progress was simply a matter of finding a great leader and giving these leaders more resources and tools. However, we have “scaled” organizations with great leaders; but that has made only a little bit of progress. For example, take a certain national nonprofit that has been working to increase college enrollment rates. Although in the eight years from 2000 to 2008, the organization grew by 750 percent, serving more than 17,000 students, it estimates that it will only reach about 2 percent of the 1 million low-income high school students in the United States. Why is this the case? Why are we not reaching the other 98 percent? What we need is a lot of progress.

At another point, I also thought making social progress might simply be a matter of providing greater transparency on particular social issues and on what’s working so that people with resources will make more rational decisions on how to allocate those resources. However, we have seen that allocating resources based on data is only one, and often not the primary driver of decision-making. Adding to this problem is that we have much less data then we thought. In fact, through our Social Impact Research (SIR) division, we have seen that in social areas like School Readiness, there is currently no available data to demonstrate aggregate program success rates since the outcome data is tracked only at an individual level based on teacher observation of students. According to the top four developers of curricula and assessment tools, the individual data cannot be aggregated to accurately show program-wide results. Additionally, the accuracy of the teacher assessments themselves varies greatly with a teacher’s level of training on assessment tools, thus supplying very little reliable data to track aggregate outcomes.

So I keep asking myself why? Why can’t we spread what works faster? Some would argue that it is simply a matter of political will—with the right policies in place progress would be faster. However, I continue to dispel that notion. We have had plenty of policies during the terms of both Republican and Democratic administrations in D.C., and in various other cities, and states that have allocated plenty of resources towards plenty of programs without creating much progress. Instead, I continue to believe that we need to do a much better job of allocating resources based on performance. I continue to believe that we need to strengthen the social contract between the people who make the policies, the people who allocate the resources, the people who deliver the programs, and the populations they seek to help. In the end, we are either providing a better outcome for them or not. If not, we must ask why not!

Photo: Creative Commons

A Social Impact Bond or a Pay-for-Success bond is an investment model where the government enters into a contracting position with an intermediary that raises private funds to finance the operations of nonprofits driving social impact. It is at this intersection where performance measurement becomes relevant. The government will pay the investment back with returns ONLY if the nonprofit in question delivers the pre-defined objectives (as judged by an independent evaluator). Therefore the government’s biggest incentives in engaging in this model are the limited liability it takes on and the fact that no tax dollars are wasted on programs that don’t generate government savings. Thus, the government is accelerating the adoption of new approaches while shifting the burden of risk on to private investors. As Jeff mentioned in the panel, this system also builds “evaluation into the DNA” of the government because funding can now be directed to those organizations that have proven to be successful.

On the other hand, philanthropy through SIBs is taking the form of a private sector instrument because these bonds are now seen as investments, with a tax treatment that is no longer under charitable contribution. In this model it is private philanthropists who are the investors providing funds to finance the operations of collaborating nonprofits and who can expect to see real capital gain or loss depending on the performance of the nonprofit. What do these returns look like? According to Tracy, although it’s too early in the US model to be able to throw out a concrete number, the UK recidivism model saw returns in the range of 2 – 13% net IRR after recidivism was lowered to a certain pre-defined threshold. As expected, the investors were mostly philanthropically motivated private foundations using a portfolio outside its grant-making corpus.

In simplest terms, the SIB or “pay for success” model rewards proven innovations while simultaneously allowing investors to get more social impact out of every dollar. However, the discussion raised a few clarifying questions and potential caveats about the implementation of this model. For example, what kind of nonprofit organizations are suitable to use this tool and what challenges will they face? Additionally, given how much resources will be required for the implementation is this the best way to utilize our already limited resources?

In talking to Jeff and Tracy about how SIBs will impact nonprofits, I understood that the organization ideal to work within this model will have an organizational structure with proven success, experience with measuring impact and the ability to scale. However more importantly, the SIB model would require not one single nonprofit but rather a network of nonprofits providing a multitude services.  For example in the UK SIB model working to reduce recidivism, there was a team of NGOs providing a range of services starting from finding jobs for the prisoners to working with their families. The objective is not to provide one service better but to stabilize lives, which in turn requires collaboration.  Therefore, this is not an easy model to pilot, let alone scale.

Additionally, Jeff noted that SIBs are not ideal for services with a high cost-benefit ratio. This model is not the right way to fund a majority of social services and is instead more suitable for services where the benefit-cost ratio is 2 and that deliver a high return on investments while having outcomes that are measurable. Finally, these programs should also be supplementary to a larger program or have safeguards against failure so that there would be no huge impact if the program fails.

The SIB model presents certain challenges to nonprofits themselves. Lisa from My Life My Choice raised the question of validity in impact assessment and performance measurement. With the amount of ambiguity shrouding the progress in social impact, who decides which results are valid and what do good outcomes look like for organizations like MLMC? Furthermore, since the effectiveness of the SIB model depends on the amount of government savings the proven nonprofit can generate, there needs to be better definition as to how existing efficiencies are being recaptured. Using the example of Medicaid, Joe Finn from the Massachusetts Housing and Shelter Alliance asked when a program is proven to have created certain efficiencies, how willing were people going to be to provide a financial return to philanthropic investors and how much?

Another growing concern among nonprofits is whether the SIB would cannibalize current grant making activities and further limit the already scarce resources available and where does the idea of reduced risk becomes reduced responsibility on the part of the government? Tracy responded by saying that both foundations and individuals are looking at SIBs as investments. Positive returns on SIBs will constitute long-term capital gain and is a different tax treatment from a charitable deduction. Hence, SIBs are no longer a segment of philanthropy and belong to a different source of money. In fact from the evidence gathered from the UK model, it seems that foundations have been leveraging a pool of money that is outside the grant portfolio; thus introducing a new pathway for NGOs to access capital to fund and scale their work while generating future recoverable government savings.

Given all this, I wondered whether this was a good allocation of resources to get government in a better contracting position with nonprofits? The answer, so far, is yes – because the incentives are in the right places. Firstly, it provides an incentive to government to allocate social service dollars through performance measurement checks with minimal risk. Secondly, it creates an incentive for organizations to measure outcomes because in a few years there will be evidence that program evaluation can in fact attract significant funding.  Lastly, it creates an incentive for private investors to allocate their resources and now receive a nominal return.

SIB’s are creating conversations between government and nonprofits that in the past have been difficult to get going.  Despite the uphill battle to get SIB’s off the ground, this tool has many positive implications beyond just the goal of doing more with less.

Illustration: Shannon May

Over the past few years, Root Cause’s Social Impact Research department, with support from the William and Flora Hewlett Foundation, has developed a methodology for identifying high-performing organizations that takes knowledge of what the proven approaches are for a targeted social issue as its starting point. Through the development of social issue reports covering a wide array of issues—from school readiness to childhood obesity prevention to workforce development with opportunities for advancement for adults facing multiple barriers to employment—we have seen increasing evidence of the benefits of starting with an understanding of the social issue, specifically what research tells us are the best approaches to make progress on that issue in order to evaluate an organization’s current and future performance.

For example, we recently completed a social issue report for funders interested in the area of school readiness. Our research for this report revealed that the most successful programs follow an approach that includes three core components: an education-based curriculum, support services for parents, and complementary services (e.g., social services, medical health benefits) designed to prevent negative life outcomes for at-risk children. Furthermore, we found that some of the best indicators for evaluating the performance of organizations pursuing such an approach include use of a certified curriculum, assessment tools related to student development, and level of parental involvement.

With such information in hand, it became possible to determine which programs are most effective in realizing their stated goals. In our own analysis of more than 1,700 childcare centers in New York City using publicly available information, we found that only 17 percent met our minimum criteria of being nonprofit, serving at-risk children, and incorporating the three core components of the proven approach. The vast majority were not employing the methods that current data show to be the most effective. What is even more alarming is that in interviews, we were told that organizations that are not using proven approaches could at times actually be having a negative impact on the children they serve.

Such information about proven approaches also provides a rigorous framework for evaluating the potential of early-stage social innovations to lead to greater progress in addressing a given social issue. It makes it possible to understand how a new approach is positioning itself to fill in current gaps or to outpace current best practices.

The enormous potential of a social issue-based approach to evaluating programs is illustrated by the information revolution that took place in the private sector during the twentieth century. One of the innovations that increased transparency at the time was the development of an independent financial research industry. Reports, conferences, and advice began to be offered by the likes of the Yankee Group, Forrester, and Gartner Research. That information, in turn, provided investors with the insights they needed to make informed investment decisions and greatly increased the amount of growth capital available to technology companies, both young and established.

If we are to significantly improve our nation’s capacity to address social problems, we need to ensure that our resources are going to the approaches that will likely demonstrate the best results – and to the innovations that have the greatest potential to make further advances. Only by starting with an understanding of the social issue and the best approaches to address those issues can we accomplish this.

The Social Innovation Fund could set in motion a similar information revolution within the nonprofit sector by requiring intermediaries this year to use information about proven approaches as a guide for how they make investments. The information about specific social issues could be broadly shared with funders and nonprofits alike to catalyze the revolution.

As 2010 draws to a close, I have found myself reflecting on the journey that the field of social innovation and entrepreneurship has experienced.

In February of 2011, Root Cause will celebrate its seventh birthday. It is amazing to me to consider how far we have come as a community working to advance the field of social innovation and entrepreneurship.

Here are some of the developments that I believe we, as a field, can be proud of:

• Social innovation is continuing to capture the attention of new stakeholders in nonprofits, philanthropy, government, and business. When I started Root Cause seven years ago, social innovation and entrepreneurship were a set of ideas about how to improve our approach to social problem solving shared by a small community of nonprofits and philanthropists. Perhaps the most prominent illustration of that community’s growth over the past several years is the existence of a White House Office of Social Innovation that is working to raise the profile of our field and helping communities spread effective approaches and invest in what works. Also, the emergence of America Forward, a coalition of innovative nonprofits, funders, and thought leaders in the field of social innovation has helped to ensure our voices are continuously heard—so that we can support important federal activities, such the creation of the Obama Administration’s Social Innovation Fund, while building champions on both sides of the political aisle.

• We are beginning to understand the importance of collaborative efforts to target tough social issues. Seven years ago our field’s focus  was on supporting and scaling individual organizations with approaches that had the potential to make significant progress on tough social issues. While building organizational capacity remains critical, the recent flood of studies, grant opportunities, and conversations focused on collaboration shows how much our thinking has matured. As John Kania’s and Mark Kramer’s recent article on “Collective Impact” impressively analyzes, no one organization has the resources, knowledge, and influence to tackle a social issue on its own. As I argued in a recent article on government’s role in collaboration that appeared in MIT’s Innovations journal, we need to target social issues collectively, and to coordinate our efforts on the programming and the funding side. One of the shining examples of this approach is the Youth Violence Prevention Funder Learning Collaborative started in Boston by the State Street Foundation.

• We have also begun to experiment with new ways to produce and distribute more rigorous and actionable information that will help us to understand the root causes of social issues, the best approaches to addressing them, and the programs that are demonstrating the best results.  Through Root Cause’s Social Impact Research initiative, we have become part of a committed community of researchers and information providers—including Charity Navigator, GuideStar, GiveWell, and Philanthropedia—that are working to improve the quality and availability of information to help guide decision-making about philanthropy.

As I look ahead to 2011, I believe that the United States is at a crossroads. The future of our society’s health and ability to advance depends on tackling our toughest challenges in education, health, job creation, and environmental sustainability. In an era of limited resources in which we must do more with less, it will take entrepreneurial and innovative leadership from all three sectors of society—public, nonprofit, and business—working together to better invest taxes and philanthropic dollars, as well as to better utilize markets in more creative and strategic ways.  Ultimately, we will need to form healthy social impact markets that enable us to direct financial, volunteer, and in-kind resources to the approaches that are demonstrating results.

I look forward to continuing the journey with you in the new year.

The emergence of “social innovation” as the term that has gained mainstream attention is not surprising. For decades, “innovation” has been a glamorous term used by business and government to excite business leaders, entrepreneurs, and the general public to think about the future with hope. Social innovation has leapt into the spotlight for many of the same reasons. When it comes to today’s social issues, we face large challenges, many of which have persisted for decades, and the idea of social innovation give us hope for a new way to solve old problems.

But turning that hope into measurable progress on our toughest social challenges is going to require discipline–to ensure this attention brings true change. In other words, now that we have firmly established social innovation as a possible way to generate greater solutions, the big question becomes: what do we need ensure this focus on social innovation works?

In the end, social innovation must be about ensuring that more resources are allocated to what works, in order to accelerate our solutions to the tough social issues that we face now and those that will arise in the future. One of the lessons of the efforts to address social problems in the United States in recent decades, I believe, is that no one sector has the resources and the knowledge to tackle today’s social issues alone. We need to create what I would call a social impact market that enables greater collaboration across sectors and social issues–in order to foster innovation and direct resources towards the most effective approaches. How do we realize this new kind of market? I believe the answer lies in the development of cadre of leaders from all sectors that fundamentally commit to fostering social innovation to ensuring that resources are allocated based on performance. We need great champions from the three sectors to become models for hundreds of thousands of others. A colleague of mine recently said, “When a challenge to a system has reached mainstream, the next stage of its evolution is to ensure there are enough well-trained leaders to make that system stick.” Perhaps that is part of the story that will unfold in the next chapter of social innovation.

To start, there was the Obama Administration’s commitment forging a new role for government, which was evident in her words.  As Ms. Obama put it at one point: “With a little nudge from government and a lot of private investment, we can create a powerful new model for making change in our communities.”  This is the vision that many of us, including Root Cause through its Public Innovators initiative, have been working to realize in recent years.  We are finding a middle path between the two ideologies that have dominated political rhetoric over the past several decades: that of the FDR-styled ‘government-as-service-provider’ on the one-hand and the Reagan-inspired ‘government-is-the-problem’ on the other.  That new way of operating – in which government plays a role in orchestrating cross-sector approaches to creating social impact – is still taking shape.  But initiatives like the Social Innovation Fund are providing hopeful glimpses of what it will look like.

In addition, yesterday’s event helped to reveal a new path forward for another key stakeholder in the future of social problem solving: our nation’s foundations. Ms. Obama’s remarks called attention to two important and complementary roles that government and foundations can play by partnering together.  While government can help to facilitate collaboration from the top down, foundations can help ensure that the ideas we encourage and ultimately spread come from our local communities. Deeply entrenched in the communities in which they operate, foundations already know the needs and some of the best solutions to addressing them.  By recognizing the need to direct resources based on results and fostering the continual creation of new ideas in their communities, foundations can play an essential role in bringing about healthy social impact market that fosters innovation and directs resources for solving social problems based on performance.

It was clear yesterday that a new generation of leaders at our nation’s foundations is poised to meet this challenge. A letter of support submitted immediately after the First Lady’s remarks by the Council on Foundations on behalf of many of our country’s community foundations impressively summarized the opportunity: “We know that to make progress on our challenges, we need to find and support the best, most promising ideas and enlist all parts of our communities in implementing these solutions. We also know that with the right resources, the right partnerships, and the right collaborations, we can develop new solutions that can be replicated and moved to other communities to address their needs.”

Yesterday’s event at the White House, I believe, brought us one step closer on our journey toward a more effective, twenty-first century approach to today’s social challenges. We are beginning to speak the same language about finding and spreading solutions and making investments based on results.  We are beginning to see the variety of roles that need to be played in order to align and amplify existing efforts to solve social problems. Of course, the road ahead is still long, but yesterday left me feeling hopeful and energized for what will come next.

What will it take to ensure that resources – not only money, but also in-kind donations, volunteer time, and partnerships – go to the organizations that are best positioned to create social impact? One key factor, I believe, is the emergence of a new generation of philanthropists – social impact investors, we might call them – who prioritize using information about nonprofit performance to guide their decisions. We need these leaders to help change the current culture of nonprofit giving in the United States. The challenge is that donors – whether they are foundations, individuals, or government agencies – often do not have the information they need to ensure that their resources are going to organizations with promising new ideas or proven, high-performing solutions.  As a result, too often, money flows to organizations based on existing relationships or aspirational mission statements, rather than a clear understanding of the outcomes that an organization is seeking to achieve and the results that it has already demonstrated.

On Tuesday night, Root Cause hosted its 7^th annual Social Innovation Forum showcase event, which provided a glimpse of what this new generation of philanthropists will look like. The event, modeled after private-sector venture capital forums, featured six Boston-area nonprofits , identified through a rigorous selection process, as up-and-coming organizations with promising new approaches in the areas of workforce development, obesity prevention, healthy aging, homelessness, empowering women and girls, and youth development through the arts. Local foundation leaders and individual donors attended to hear the organizations pitch their approaches, with an emphasis on their performance to date, and the resources they need to increase that performance and spread their ideas.

These leaders’ responses were enthusiastic. During the event, we asked attendees to commit some resource, be it a new connection, an in-kind or monetary donation, or a date to meet for coffee, to one or two of the organizations they found most interesting. Root Cause then collected these commitments and posted numerous examples through the #sif2010 hashtag on Twitter. These resources, I believe, will help these promising nonprofits creating lasting social impact for Boston’s residents.

Looking ahead, as we work to create a vibrant social impact market that fosters social innovation and directs resources based on performance, we will need more of these philanthropic leaders who demand information about performance and are ready to direct resources to those organizations with the most promising and proven approaches.

The compact is an exciting and necessary step toward bringing the nonprofit, philanthropic, business, and government sectors together to move the bar on pressing social issues in the areas of economic development, education, the environment, health and health care, and youth, family, and elderly issues. In an op-ed I wrote in the Boston Business Journal almost a year ago calling for an Office of Social Innovation in the Massachusetts, I said that, too often, innovative and proven approaches already operate in our communities, but are not given the support they need from government. The state has the potential to help the promising ones extend their reach and have far greater impact by putting new policies, systems, and resources into place.

Here is what the compact commits the administration and the nonprofit sector to do:

The Commonwealth has agreed to:

• Welcome social innovation organizations with vision and experience in improving the lives of citizens
• Initiate a conversation with providers on the potential for unprecedented action and new approaches on infrastructure and government operations
• Commit to exploring the application of new, results-driven solutions to persistent problems that have gone unsolved despite repeated efforts and partnerships
• Explore new opportunities to take better advantage of locally cultivated talent directed at educating and caring for residents
• Provide new supports to promote the work of social innovation partners to reach a larger group of residents in need of assistance

The Social Innovators have agreed to:

• Engage in an active problem-solving dialogue with the leaders of state government
• Provide consulting services to government agencies to build the Commonwealth’s portfolio of social innovation initiatives and reach more residents
• Supply support, guidance and management for select projects based on the needs of residents
• Serve as a central point of contact for all potential national and local social innovation initiatives
• Channel information to the Governor and his cabinet regarding opportunities for Massachusetts on these opportunities as appropriate

There are many examples of the nonprofits that would be able to do much more with such support. Year Up has developed an exciting and successful training program for urban young adults to close the opportunity divide by providing them with professional skills, college credits, and corporate internships. Strong Women, Strong Girls, a program founded by a visionary college student, uses the study of female role models and a creative mentoring program to build self-esteem and leadership skills among at-risk girls in grades 3-5.

In our work at Root Cause, we have identified many more examples of organizations with promising new ideas through our Social Innovation Forum. Our recent reports on school readiness and the best organizations working on the issue in MA have inaugurated a new methodology for using data to find the highest-performing organizations with proven approaches to their social issue. And our partner in today’s signing at the State House, New Profit Inc., is supporting a portfolio of leading nonprofits that are working to dramatically improve opportunities for children, families, and communities.

Today is just a beginning. There is much more for all of us to do to leverage the work of these organizations to better address every Massachusetts resident’s basic needs. I applaud Governor Patrick for having the vision to play a leadership role in that work.

Landrieu’s job will not be an easy one, to say the least. As we approach the five-year anniversary of Hurricane Katrina, New Orleans still faces many of the challenges that the destruction of the city exposed and exacerbated. Add to that the burden of our nation’s current economic situation, and New Orleans appears as a microcosm of the United States and the issues we are currently confronting. When Landrieu walks into New Orleans City Hall, he will encounter, on the city level, a similar situation to that which President Obama found when he took office.

There are a number of reasons to be hopeful about what Landrieu can do. First, the overwhelming victory of the first white mayor in 30 years in a city where 67% of the population is black suggests that New Orleans is moving past the racial divisions that it has experienced in recent decades. Landrieu and the city’s population appear eager to work with leaders representing all backgrounds and colors to build a better New Orleans.

Additionally, the election of Landrieu provides an important opportunity to see up close how forward-thinking government leaders throughout the United States are taking on new roles in order to move the bar on our most pressing challenges in economic development; education; the environment; health and health care; and youth, family, and elderly issues. Landrieu represents this new breed of government leader who is taking bold steps to identify and help to spread the most effective, efficient, and sustainable solutions to social problems. Through the Office of Social Entrepreneurship that he founded while serving as the state’s Lieutenant Governor, Landrieu has demonstrated a commitment to ensuring that government resources for solving social problems go to organizations with proven results, facilitating public-private partnerships that maximize resources for addressing social problems, and creating a policy environment that encourages social innovation. Last April, we awarded the then Lieutenant Governor the first Root Cause Public Innovator Award precisely for this new style of leadership and his practical approach to the state’s social problems.

Now, as New Orleans enters a new chapter in its efforts to rebuild after Katrina, it is time for the nation to re-engage with New Orleans as well. With its new mayor, New Orleans is poised to provide us with a great American story of a city that pulled itself out of a state of dismay and distress to become a shining example of American social innovation. And that story will include many crucial lessons for other American cities as well.